By Megan Landers and Bradley Zebert

There was more than just Vat rate increases proposed in Minister Godongwana 12 March 2025 Budget Speech. Changes were also proposed to the rules that govern taxation of foreign retirement funds received by South African residents. Currently, lump sums, pensions and annuities from employment outside South Africa are exempt from normal tax.

Current Taxation

Local retirement lump sums are taxed at a reduced rate, the first R550,000 is tax exempt, and normal tax rates for individuals apply to annuity payments. However Section 10(1)(gC)(ii) of the Income Tax Act exempts any lump sum, pension or annuity received by a South African resident, from foreign retirement funds for employment outside South Africa, from normal tax in South Africa.

Interestingly, this foreign pension exemption was intended as an interim measure. It was introduced in 2000 when South Africa moved from a source-based taxation to a worldwide-based taxation. The taxation of foreign pensions raised controversy.

Why shouldn’t foreign pensions be taxed?

Many reasons were given as to why foreign pensions should not be taxed in South Africa: It was argued that it might discourage foreigners from retiring in South Africa, that no tax deductions in South Africa were allowed for that pension contribution, that the income from a pension is static, and that any tax imposed would reduce the pensioner’s income. At the time, it was decided that the taxation of foreign pensions needed further investigation. Until we had determined the economic impact of taxing foreign pensions and how contributions to foreign pension funds should be dealt with, foreign pensions should not be taxed in South Africa.

Double taxation agreements

Generally, foreign countries would also want to tax these foreign pensions because they are from a source in that country. However from a policy perspective, certain countries hold that taxation should be allocated on the basis of residence alone. As the country of residence will be required to support those pensioners in their old age, the country of residence should levy the tax.

In line with this policy perspective South Africa has double tax agreements with various countries, allocating South Africa exclusive taxing rights on pension payments to South African residents (Ts & Cs may apply). Signatories to these double tax agreements include Austria, Belgium, Bulgaria, China, the Czech Republic, Denmark, Hungary, Israel, Italy, New Zealand, Portugal, Russia, Spain and the United Kingdom.

Double non-taxation

When these double tax agreements are read with the current version of section 10(1)(gC)(ii), the problem is clear: Only South Africa (as the country of residence), may tax the pension received by a resident individual in consideration of past employment in the above mentioned countries. However in domestic law the funds are exempt from South African income tax, thereby resulting in double non-taxation.

In the draft Taxation Laws Amendment Bill 2025, this current exemption is removed. In terms of this Amendment Bill, foreign pension payments received by a resident individual in consideration of past employment, will be taxed in line with residence-based taxation, therefore upholding South Africa’s treaty rights to tax.

Being tax efficient is an important part of great financial management. In this blog, a group of South African tax experts at AJM Tax share their tips and explanations on tax issues. Learn everything you need to know about tax, from deductions you never knew about to retirement savings and capital gains. The first Tuesday of every month is Tax Tuesday.